Our view: InterRent REIT (“IIP”) reported a solid in-line Q4. Guidance for 6-8% revenue growth, SP NOI growth of high-single- to low-double-digit growth is robust and largely consistent with 2023. With 2023 interest expense headwinds behind it, FFO growth looks materially better at +13% in 2024E and +10% in 2025E. We believe the higher growth vs. ON peers, though, is largely reflected in its trading multiple. Impact of foreign student caps is one to watch given its 15% exposure to students although it does not appear to be big issue for now. Target $16.50 (+3%); maintain OP.
Key points:
Double-digit SP NOI growth continued: +10.5% (SP-Rev +8.2%; SP-Exp +3.9%): Revenue growth was driven by SP-occupancy at 97%, +180 bps q/q, +20 bps y/y and SP-AMR of $1,585, +1.2% q/q, +7.5% y/y. AMR growth was fairly consistent across all of its markets within 7-9%, with GMA at low end and GTAH at high end. Taxes were up +14%, utilities -6%, opex +3%. SP-NOI margin was 65.6%, +140 bps y/y. Newly-converted Ottawa office building, Slayte, has leased up well, now at 91.1%+ occupancy. Vancouver is seeing slightly higher vacancy (6.7%) given repositioning efforts underway.
Outlook: IIP is guiding 6-8% revenue growth, high-single- to low-double- digit SP NOI growth. We are expecting turnover rent growth of ~20%, turnover rate of 20-25% and renewal rate growth of 3-5%, largely similar to 2023 (21% rent growth on turnover, 25% turnover rate and 3.3% renewal increase). What could impact IIP’s portfolio (perhaps slightly more than peers) is the foreign student cap - students account for 15% of IIP’s tenant base, a (somewhat surprisingly) meaningful number. IIP does not expect much of an impact in the near term (1/3 of its student tenants are in Quebec where cap > intake) but we won’t know until August when student leasing activity typically occurs.
Capital allocation: IIP sold 5 properties in Cote-Saint-Luc, Quebec for $46M, net $22M ($205K/suite, mid-4% cap). It had previously identified net proceeds totalling $75M. IIP has 4 development projects, of which 360 Laurier, Richmond & Churchill in Ottawa are at more advanced stages. Capex spend is expected to be moderately lower than 2023. Despite tight market, there is no departure to its value-add strategy.
Flattish interest expense in 2024 should provide a boost to FFO/unit growth: Post quarter, IIP financed $184M of mortgages at 4.25% (vs. $145M maturing at 6.06%). Variable exposure will be <1% post refinancing. After a +28% interest expense headwind in 2023, interest expense should be largely flat (+1%) in 2024 and +3% in 2025.
Valuation: Our NAV of $15 (+3%, on higher NOI) is based on a cap rate of 4.4% (unchanged) vs. IFRS BV/unit of $17.71 (+0.5%), based on a cap rate of 4.22% (+0bps). Our price target of $16.50 (+3%) is based on a parity (unchanged) to forward NAV. Maintain OP.